SIOR Industrial Committee – 2nd Virtual Roundtable (via teleconference) – June 7

ANNOUNCEMENT

SIOR Industrial Committee – 2nd Virtual Roundtable (via teleconference)

Thursday June 7, 2018 – 8AM Pacific; 9AM Mountain; 10AM Central; 11AM Eastern (International Members Welcome)

Dear Industrial SIOR,

You are receiving this announcement because you have participated in a SIOR industrial event over the past year. As part of the Committee’s mandate, structured networking among SIORs is a primary goal. To that end, we will be holding our second Virtual Roundtable on the date above. Each table is limited to eight participants so everyone can speak.

The call is targeted at 45 minutes and no more than 60. The time will be divided into three, not necessarily, equal segments:

  • General Market Conditions – Everyone has a turn
  • Are there space shortages in your market? And are there investment/development opportunities?
  • Problem Solving: Share a problem in your business that other SIORS on the table can help you solve?

Concurrently, we are collecting National Industrial Cap Rate data for a forthcoming publication where you will receive credit for your contribution and a complete data set you can use for your own business/publications.

Please respond to the following five (5) questions: (can all be one line for simplicity and we will parse the responses.)

Can you attend the Virtual Roundtable?
(If yes, call information and more instructions to follow)

Metro Area?

Cap Rate for A* Product in your market?

Cap Rate for B** Product in your market?

Will you be a Virtual Table Leader?
(Requires a Conference Call account for you to host)

*A Product is institutional quality, newer development, credit tenants, Build-to-Suit
** B Product is functional, older, shorter term leases, opportunity/value-add

 

 

Gardena Industrial Summer Preview 2018

The Gardena market continues to rage. Could be the best industrial market in the United States. Certainly prices are amongst the highest.  After doubling in five years, year-to-year increases are still rising but more moderately. Space shortages are severe and causing tenants to panic who do not have a long term home. Space Scarcity will keep values high. Land rents are soaring dues to restrictions on trucking in many municipalities. Lots of space is trading in the off-market, quite a bit on our Industry Lands platform

While Gardena has been our business home for 35 years (and no one has better relationships), we have a strong national presence and are more effective than larger companies. We are not locked into one organization like the national brokers but can pick the best SIORS in any market we choose. I’ll be in Warsaw, Poland this summer to Co-Chair our European Program and make more international connections.

Besides our 35-year industrial brokerage career in Gardena, we have two new initiatives. We are applying tech to get more space on the market. Sharing, A.I., analytics, and automation are new ways to make more space available by improving older, infill industrial buildings. We are looking for investors and investments to purchase more property. More information can be found at IndustryLands.com.

Industrial Building Portfolios – In Heavy Demand

Industrial Building Portfolios, $50MM and greater, are where the action is today. Institutional investors need scale and the only place to find it, as far as industrial, is in the portfolios of National Operating Companies and Private Partnerships. Institutional Investors stand between the real estate and fixed obligations to satisfy pension, insurance, and retirement plans. It’s major financial plumbing and as the obligations grow so does the need for product. Roll ups, a familiar consolidation vehicle in corporate America, is now the preferred way for large real estate investors to buy. Unknown to many, national industrial building ownership is consolidating and almost all local developers/investors sell into these relatively few pools as a final exit.

In order to obtain more income, institutional investors have different strategies. Purchasing brand new developments is a popular way to buy yield. New to the field, are sub-institutional quality buildings, also called “B” and “C”. On its own, a single “B” or “C” asset, may not garner much institutional interest, but as part of a larger portfolio, the property trades at a very low margin. There is strong financial support for proven cash flow in infill markets, even if the buildings are older. Average vacancies across portfolios and the cost to operate these buildings are low.

In Los Angeles, and a few other markets around the U.S., small investment partnerships and family owned businesses have seen the value of their real estate explode. The portfolio effect is one reason, but the real estate itself, often located in rough industrial, is the beneficiary of urban economics and distribution networks. Formerly junky industrial buildings are fetching institutional quality prices.

Outside of major markets, the logic is much the same although prices tend to be a lot lower. Infill industrial, freight hubs and key logistic locations are the valuable pieces that make up a larger portfolio. Many private operators have spent a generation or two expanding these building networks to where the whole is worth more than the pieces. No matter how the investment partnerships and operating companies were formed, the buildings are analyzed for their cash flow potential.

Why now? Not only do portfolio values increase through aggregation, but there are also positive pricing effects due to consolidation. Portfolio theory demonstrates that there are rewards with larger scale. Lower costs of administration and management benefit beneficiaries directly. Scale, across a broad set of assets, reduces cost and expenses.

Big Data, particularly national parcel data, has an important effect on Portfolio Management.  Big Data and Analytics increase the ability to seek, analyze, and close on big industrial building holdings in very short time frames. This creates a layer of liquidity that is new for industrial building assets of this type. Because of Big Data sets and large values, the game has taken on new dynamics. For one thing, Occupiers have unprecedented advantage to leverage occupancy with ownership that yields tangible benefits. For portfolio owners, it’s the speed to monetize large asset pools that is a significant new innovation.

On the Buyer side, the top tier of industrial buyers is limited to a small handful of REITs, Insurance Companies, and  Private Funds who can write a check for $50MM or greater.  Below the top tier, there is a spectrum made up of different buyers and deals. Opportunistic, credit lease, multi-tenant, or tenant-occupied each have applications to larger pools and it is often the developer’s place to help the investment fit. In capable hands, a rough-hewed older industrial building can be turned into a well performing part of an institutional portfolio as long as it is bought correctly on the Spectrum.

Geography is another way large investors make price adjustments on the fly.  Certain major markets establish an index based on market size. Los Angeles, New York and Dallas are primary benchmarks. Other markets are adjusted accordingly into a national matrix. While these indexes are based on real numbers, thin trading in smaller markets leads to mispricing. As data improves and more experienced local analysis makes its way to decision makers, the business of large portfolios is more transparent. Knowledge of U.S. markets, access to product and personal relationships with leading investors make large industrial assets more liquid and valuable than ever before.

We advise, we sell, or we bring in our own deal. Please let us know if we can help with your Industrial Building Portfolio.

Thanks for Subscribing,

Jim Klein, SIOR

310-451-8121

jimklein@kleincom.com

PS: Participation Available in Industrial Syndication – Infill Los Angeles

(If you want to be removed from this mailing, please respond and we will immediately delete you from our database)

Race for Space – The New Dynamism

Dynamic pricing is becoming a greater influence on space leasing and building sales. By dynamism, I mean fluctuating rents separate from conventional underwriting.  A “spot market” is emerging to satisfy demand for smaller, flexible, and elastic spaces. Many examples include Truck Yards, Warehouse Sharing, Creative, Cannabis, and other categories of sub-space where “street rents” are disconnected from contract rents.  WeWork and Amazon are two primary examples that contract with the Landlord at one rent, and lease out space bits at higher rents. Public Warehouses, Self-Storage, Swap Meets, Studios and Truck Yards operate along the same model by collecting additional rent by offering “alternative occupancies” with varying degrees of added services. The revolution is any building can be pieced out especially with easily acquired technology that can create “smart” buildings for automation, surveillance, and access.

Dynamic pricing is buttressed by space scarcities and rent surges. The L.A. Harbor is a perfect case where proximity, drayage costs, and labor unrest, results in dynamic fluctuations partially geared to seasonality but more to sheer demand. Unused yard areas that can be repurposed for truck parking are going for $.35 per foot and warehouse sections are approaching $1.00.  Long standing tenants and family owners are the primary beneficiaries by subbing out their unneeded space.

We sold this 25,000 square foot building two years ago to a Chinese investor and he created the closest example I have seen locally to a “smart” building. In order to sustain autonomous production, he installed 100% IP surveillance cameras, automatic doors and levelers, new power, fire sprinkler and Wi-Fi throughout. Because it is a 24-hour operation with robots, the owner built a small apartment upstairs so the entire operation can be centrally monitored and controlled around the clock. The building itself becomes a major input to the production process. In addition, once the electronic infrastructure is in place, sharing is simple.

Runaway Pricing:

Dynamism is just as clear in the scramble for investable assets. Many small partnerships or family businesses find themselves sitting on incredible wealth from secondary industrial properties they have acquired through a long, productive business career. Particularly in Southern California, the combination of high rents, low cap rates, upside potential, and high dollar values have attracted the largest investment funds to the region. Not because these are terrific buildings, but “B” and “C” buildings generate strong cash flows, in great markets, and can sustain reliable income. Investors receive a slight premium with steady performance and dynamic increases with hands on operations.

One opportunity for Owner/Users is the high price of Los Angeles real estate, soon approaching $200 per foot. It enables them move to Inland Empire, Las Vegas, or Phoenix, all quickly becoming a part of Greater Southern California. Many local companies can improve their operation at greater savings and still have a hefty profit left over. While I hate to see business decamp from Los Angeles, no one has a better national network of experience to accomplish a seamless, “pick up and move” strategy than I do.

Dynamic Trading Network

As speed ramps up, it will be important to have the platform keep up with dynamic space trading.  More and more it will be discrete electronic networks that will replace word-of-mouth and informal communication. Public Listing Services will always have a place, but the “electronic whisper network” is a practical solution to transact deals rapidly and still keep offerings confidential when necessary. Torrent networks, Slack, and RocketChat are a few of communication tools we are exploring. In addition, we want to replace the lumbering process of “papering” a deal by using faster agreements. For now, AIRCRE forms combined with a paralegal service based in India is allowing us more time for deals but is not the ultimate solution

Building a strong Digital Operation is the only way to maintain parity with dynamism. In our work stations, we combine field video, parcel information, and Salesforce leads to search for space deals that would otherwise not be “on the market”. In essence, we are creating space through Search and Spot Pricing.  Because of the velocity, we can often deal the space faster than listing it. While still crude on our end, Digital Operations is a remarkable return on investment. For the first time, customers are investing alongside of us to create richer communication and data platform to see those deals.

Please let us know what we can do to help.

Jim Klein, SIOR
310-451-8121
jimklein@kleincom.com

101-109 W. Foothill Blvd., Glendora, CA 92807 – 5980 Square Foot Retail Investment – $2.25MM

5 Unit Retail Building at Signalized Corner of Foothill Blvd and Glendora Avenue
Annual Rent: $131,132.00
Expense Est.: $40,000.00
NOI: $91,132.00
Cap Rate: 4.05%

Asking Price: $2,250,000 – All Cash

Free Public Parking Immediately Next Door

Please contact Jim Klein, SIOR,; 310-451-8121; jimklein@kleincom.com

 

2018: Dynamo Year Ahead for Industrial

There is everything going for it this year. Big Capital is heavily on the warpath with more cash than ever looking at older, smaller and tertiary property with as much effort as they do with “A” product. Occupiers are armed with low tax rates and incentives for new plant, equipment, and improvements. Technologists are advancing innovation to increase cash flows with robotics, automation, ecommerce and sharing. At the top, the Developer-in Chief is intent on making commercial real estate and U.S. Industry the biggest winners in the economy.

What does it look like on the street? Stressed conditions with very little space, surging prices, and nothing but cash.  Now that Occupiers have been ignited with favorable tax treatment, even more capital will be coming in. The biggest shortcoming is very little new product will be created. Instead Big Capital is looking for anything with yield and upside promise wherever it might be. When it comes to older, infill industrial, Big Capital will clash with Occupiers. There will be more big investment buys in the march to scale.

From the brokerage perspective, it makes turning over new product primary. Without Xcelligent, one of the main listing services that filed Chapter 7 before the Holidays, it will return us to a period of less data consolidation and more “open” and “off-market” listings.  The gap of market information will greatly reward those who can find product.  There will be less emphasis on traditional agency work and more on trading and transacting. It’s where we see payoff in digital operations.

Under this type of market action, Occupiers will continue to be disadvantaged. Conventional ways of facility planning will need to give way to “market opportunities”. Big Capital has so many tools on hand that conditions that deter Occupiers like timing, tenants, and environmental are simply adjusted in the price at closing. I see the return of a separate “User Price”, not seen since interest rates hit bottom and even a “development for sale” business.

While competition for assets will be intense, in a much different sense, Big Capital and Occupiers are natural allies. Without income there is no deal. Many large Occupiers regularly leverage their occupancy into favorable terms. Under the right circumstances, the few merchant builders left will sweeten the pot because a User-in-Tow is a meaningful advantage. Occupiers on the fence will finally “pick up and move”. They will leave California, avoid state taxes, expense a new development, and sell their old infill building for a big profit. Occupiers going asset-lite with contract production and ecommerce can also gain equity wherever their goods reside.  Even if you don’t take title solely in your own name, many partnerships will be created where Occupiers can benefit from Big Capital and new tax laws.

As the year begins, the sharing revolution continues to amaze. I see all sorts of unconventional space sharing in Los Angeles that are based on trust and IP-enabled security cameras. Landlords can earn more rent and Occupiers can control their space needs precisely. So far, most sharing arrangements are created organically through word of mouth and among neighbors. There is absolutely no market or exchange for shared spaces, but it might be the fastest growing part of the industrial real estate business.

Gardena, Los Angeles, Inland Empire, and across the U.S.
On Market/Off Market
Big Investors/Small Investors/Developers/Occupiers/Property Owners
Let’s make a deal in 2018.

Thank you and Especially to My Loyal Clients,
Jim Klein, SIOR
jimklein@kleincom.com
310-451-8121

Great Example of Creative Space

This is a great example of Creative Space. It comes from Industry City in Brooklyn and shows a 14,000 square foot space they currently have available. There are 120 desks which works out to 8.5 people for every 1000 square feet. It is the information factory of the future.

Industry City was kind enough to host us last year. As you can see the space is surrounded by windows and filled with light. There are many amenities on campus – food and fitness are primary ones. Location on the waterfront is also spectacular.

For those who like to read, Jennifer Egan’s new book, Manhattan Beach, takes place not far away at the Brooklyn Navy Yard. In that scene, the protagonist was a worker in a very similar space making uniforms in a garment factory.  When you look at the site plan above, the primary difference is that the sewing machine has been replaced by the computer but the space is being used in almost the exact same way as it was 70 years before. The concept of space utilization has not changed, only the technology.

Using Spiders, Extractors, and Crawlers for Insights and Leads

Spiders, Extractors, and Crawlers are all software tools that go out and search metadata to retrieve results that can be helpful to your business. They are often used to search for emails. One popular tool, once endorsed by Mike Lipsey, president of The Lipsey Company, is the eGrabber, a lead generation software. I’ve used it for many years but customers have become so overwhelmed that I question the effectiveness of HTML mail any longer. So far, the tool I use that tracks emails comes standard in Salesforce and counts the number of times your email has been opened. This provides metrics that can refine your marketing program.

Spiders, Extractors, and Crawlers are helpful in other ways. I input search terms like Gardena manufacturing companies, California commercial investment properties, or new warehouse development, and while it works a lot like a Google search, crawlers search hundreds of search engines, not just those results that are contained on Google servers. The overwhelming problem you will face is a complete deluge of data that is almost completely impossible to parse unless you have a scientific way to manage all the results. I’ve found basic sorting and deleting can make a dent but not enough to be immediately useful.

Most non-technical people like me face two choices. Either buy tools that are specific and limited in their application or hire outside help with programing skills to extract more useful data.

Why would an SIOR want to bother with data extraction? Well, through data extraction I’ve found both tenants and deals I would not have found otherwise. In the world of high finance and hedge funds, data scientists pore over tweets, Facebook, and other data streams to acquire proprietary knowledge for trading purposes. Data management on this level is a major step to higher productivity.

I am not advocating hiring a staff of PhD’s to run your real estate analytics and build an empire. However, thinking about how you obtain data, process, and output it, will give you new insights and leads. My next step is to install Scrapy, a powerful and simple extractor. It’s written in Python, the language that runs kid’s toys like Arduino and Raspberry PI. But no, I’m not even suggesting learning that simple language. For a few hundred dollars, I found a Python coder on the internet and they will just give me a few basic commands I can use over and over to get the data I need. I’ve only skimmed the surface and am a novice myself, but data is a gateway to bigger and better deals.